Mortgage rates: when to lock

October 27th, 2010

What if I lock in my mortgage and rates fall? What if I don’t lock and rates climb? If you’re applying for a mortgage, you’re probably asking these questions no matter which mortgage calculator you are using. One of the most asked questions of any mortgage professional is “When should I lock in my rate for my mortgage application?”

Whether you are using a refinance calculator to determine your monthly savings on a mortgage refinance or closing costs and prequalification calculators for a new home loan, your mortgage rate is important. When you submit your mortgage application you are doing so with a certain interest rate in mind. If you choose to lock right away you are guaranteeing the rate and terms on the application for a certain period of time, generally 30 or 45 days. If your transaction takes longer than this lock period you could lose your rate and terms if mortgage rates go up.

Refinance or purchase?

If you have a refinance mortgage application being processed, ask your mortgage professional how long it will take to process and fund your application. With the high volume of refinance applications in the pipeline across the country do not be surprised if the answer is between 30 and 45 days. If this is the case then you will not want to lock your rate and terms for less than 45 days.

If you are purchasing a new home, first inquire if your lender can process and fund your application within the time frame for settlement agreed upon between you and the seller. Second, do not lock for a period less than the settlement time frame. Even though the price for a 30-day rate may be better than for a 60-day rate if your settlement closing is not supposed to happen for 55 days do not count on getting the 30-day rate lock price if you cannot close within that time frame.

Ask about lock extensions

Before locking in your mortgage rate, ask your mortgage professional what the policy is should you need to extend your rate lock. Mortgage processing is not an exact science and depends on timely performance from a number of service providers.

Your mortgage could be delayed if appraisers, title officers or settlement agents get behind on their paperwork (or even misfile your application), or if an inaccurate credit report needs correcting. If you need to extend your mortgage what is the potential cost to you? This is especially important on purchase transactions for short sales or foreclosure purchases where you are waiting on someone at the bank to make a decision or forward paperwork.

Rate float down?

Most borrowers are concerned about “missing out” if they lock in their mortgage rate and after doing so rates drop further. Lenders recognize this and although the rate lock protects you from any rate increases during the lock period, any rate drops expose the lender to possibly losing a transaction if you drop your application and go somewhere else.

Because of this most lenders have what is known as a “float down” policy. Ask your mortgage professional what are your options if rates do decline during your processing period if you have locked in your mortgage rate and terms. Most lenders have a window in which you might float down your interest rate, but usually only one time and several conditions must be met.

Use mortgage calculators to control your risk

You are making your mortgage application for a refinance mortgage or new home loan based on results using specific mortgage rates you have input in one or several mortgage calculators. If you choose to float your mortgage rate during the application period you are risking the savings from your refinance or possibly your ability to qualify for a new home loan if you are pushing the required debt to income ratios.

Before locking in, use the mortgage calculators to determine your possible savings if rates drop 0.125 percent versus your possible increased payment if rates increase 0.25 percent. Is the risk for a much higher rate worth the potential savings for a slightly lower rate? Use a higher rate increase than decrease since rates typically climb faster than they drop.

Knowledge is power

With knowledge of lender policies for extensions and float-downs you can make the best decision as to when to lock in your mortgage rate. The general rule is that it is generally better to lock too soon than too late. Avoid all risk by locking your mortgage rate as soon as your lender will allow and lock it through your settlement period.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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